Tobacco giant Philip Morris International (NYSE: PM) has a global presence, with its products available on six continents and in a wide variety of different countries. Various parts of the world have different growth prospects and face different economic conditions, but Philip Morris has always dependent on its presence in the highly developed nations of the European Union to drive a big portion of its business. Even though Europe's economy remains on shaky ground in some ways, that hasn't hurt Philip Morris, which has seen some of its best results there. Let's look more closely at why the EU has been a good market for Philip Morris in 2016 and whether it can keep performing well there.
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Image source: Philip Morris International.
How Philip Morris made Europe strong
In terms of sheer numbers, Philip Morris International's European Union segment has been the most important from a profitability standpoint and has also been a major player in pushing its top line higher. During the third quarter, Philip Morris' EU segment posted stronger net revenue than any other segment, edging out the Asia region. That brought its nine-month total in the EU to $6.22 billion, pulling it to within $19 million of its Asian market revenue.
What also stands out for the EU is that it's the only region in which Philip Morris posted sales gains on a dollar-denominated basis, rising 1.4%. That says more about the relative impact of currencies on Philip Morris than it does about organic growth, but at 3.4%, the EU did post higher growth excluding currency than any other region except the small Latin America & Canada segment.
Perhaps more importantly, the European Union was also the only segment that produced gains in operating company income on a year-over-year basis. Profits for the first nine months of 2016 in the EU climbed 4% to $3.10 billion. That's more than Philip Morris brought in from either Asia or its Eastern Europe, Middle East, and Africa segment (EEMA), and it was a key part of what limited companywide operating income declines to just 5.8%. Otherwise, double-digit percentage drops in the EEMA and Latin America & Canada segments would have had a much greater impact on overall profits.
In addition, the EU has seen more favorable trends in cigarette shipment volumes than Philip Morris' other regions. So far in 2016, volume in the EU has climbed 0.7% to 148.4 billion units. That might not look all that impressive, but compared to declines of 3% to 8% elsewhere in its global network, Philip Morris is happy that the European Union is contributing as much as it has.
Can the European Union keep helping Philip Morris International?
One area that helped Philip Morris in the EU during 2016 was the fact that the strength of the U.S. dollar against the euro let up somewhat over the course of the year. After impressive gains in recent years, the dollar plateaued for much of 2016. The last couple of months of the year restarted an upward trend, however, and that has some concerned about the sustainability of growth in the EU if the euro continues to decline toward parity with the dollar.
That said, Philip Morris' fundamental growth prospects within the EU are still solid. Market share has climbed slightly during the year, rising to 38.4%, and the key Marlboro brand is responsible for about half of that share. The company reports that volume gains have been especially strong in the Czech Republic, France, Poland, Spain, and the U.K., and Marlboro has done best in France, Germany, and Spain. Given how much Philip Morris has tried to emphasize the key brand in its Marlboro 2.0 revamp, those results are encouraging for the company.
On the other hand, some areas within the EU remain weak. In particular, Greece and Italy have offset some of Philip Morris' growth in shipment volume. Even so, Philip Morris doesn't seem particularly concerned, and the company routinely has to deal with regional economic upheavals that temporarily affect its business.
What to watch for in 2017
For 2017, the most interesting thing about Philip Morris' presence in the EU will be seeing how changes to the European Union itself could affect its business. With the U.K. looking to move toward an exit from the EU, trade patterns throughout the region could change, and that could force Philip Morris to make internal adjustments.
Nevertheless, many are growing more optimistic about the prospects for a more robust economic recovery within the European Union. If that happens, then the EU's influence on Philip Morris International's business will only grow in 2017 and beyond.
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